Fed’s Regulatory Powers Challenged Under Senate Plan

More than a year after the economic crisis hit, legislators continue to work on how to reform financial regulation and stave off a future crisis. The latest proposal comes from Sen. Chris Dodd of the Senate finance committee. Financial experts review the plan.

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JEFFREY BROWN:

More than a year after the economic crisis hit, legislators continue to work on how to reform financial regulation and stave off a future crisis.

The latest proposal came yesterday in the form of an 1,100-page draft from Senate Banking Committee Chair Chris Dodd. At a news conference, the Connecticut Democrat declared the previous regulatory regime had failed.

SEN. CHRISTOPHER DODD, D-Conn.:

The financial crisis exposed a financial regulatory structure that was the product of historic accidents, one after another, over the past 80 years, created piece by piece over decades, with little thought given to how it would function as a whole, and unable to prevent threats to our economic security.

JEFFREY BROWN:

Dodd called for effectively stripping the Federal Reserve and the Federal Deposit Insurance Corporation of the power to regulate banks.

Instead, his bill would establish a new financial institutions regulatory administration to consolidate oversight of the nation's banks into one entity. There would also be an agency for financial stability to identify and regulate firms considered too big to fail, and a consumer financial protection agency to oversee mortgages, credit cards and the like.

As he laid out his plan, Dodd was highly critical of the Federal Reserve, while at the same time insisting he's not out to punish the institution.

SEN. CHRISTOPHER DODD:

I really want the Federal Reserve to get back to its core enterprises, in a sense, to do what it's designed to do, monetary policy, dealing, obviously, with a lender of last resort, the payment systems. Those are what they're designed to do.

We saw over the last number of years, when they took on consumer protection responsibilities and the regulation of bank holding companies, it was an abysmal failure.

JEFFREY BROWN:

By contrast, a bill in the House offered by Financial Services Chair Barney Frank, while sharing some goals and features of Senator Dodd's proposal, maintains a powerful bank regulatory role for the Fed.

The Federal Reserve, in fact, remains a lightning rod in this debate, as many Republicans and Democrats are eager to rein in what they see as an all-too-powerful institution.

Republican Congressman Ron Paul of Texas has authored a bill that would audit the central bank's monetary policies and decisions, an idea that Fed Chairman Ben Bernanke has publicly opposed.

And some perspective now from two people who have joined us at points along the way this past year, Joe Nocera, a financial columnist for "The New York Times," and Simon Johnson of the MIT Sloan School of Management and the Peterson Institute for International Economics.

Well, with all these proposals swirling around, help us think about the problem of reorganizing the regulatory system.

For example, Joe, starting with you, is it most important who does it or what exactly they do, or both?